As the northern hemisphere prepares for the winter, bleak headlines warn of an energy crisis enveloping much of Europe and North America. The transition to cleaner energy sources, combined with an unusually cold season last year depleting natural gas reserves, and the resulting inflation on coal and oil prices have created a perfect storm for the energy markets. In the UK, heavily dependent on natural gas to generate electricity, wholesale prices have soared over 1,400%.
The energy crisis comes as industries across the board are being forced to examine their carbon footprint with a view to reducing emissions. Over the last year or two, environmental, social, and governance (ESG) topics have crept up the corporate agenda, with financial institutions among the first to feel the effects of regulation to prevent so-called “greenwashing.” The EU Sustainable Finance Disclosure Regulation establishes a differentiation between types of investments deemed “sustainable” and puts the onus onto institutions to disclose which investments fall into which categories.
Earlier this month, value investor Mohnish Pabrai took part in a Q&A session with William & Mary College students. Q3 2021 hedge fund letters, conferences and more Throughout the discussion, the hedge fund manager covered a range of topics, talking about his thoughts on valuation models, the key lessons every investor should know, and how Read More
It seems only a matter of time before more industries come under similar scrutiny. More firms could be made liable for failure to disclose policies or practices that don’t measure up to public statements regarding sustainability.
Crypto’s Self-Perceived Immunity Can’t Last
The green debate often ends up being curiously adversarial in the cryptocurrency space, as demonstrated earlier this year when Elon Musk voiced his concerns about Bitcoin’s energy consumption and announced Tesla would stop accepting Bitcoin payments.
Typically, the pushback involves many in the crypto community becoming defensive about the proportion of crypto mining that uses renewable energy. Another common argument is around the value generated by crypto and the fact that the banking system doesn’t come under such scrutiny for its energy consumption.
These arguments come across as increasingly disingenuous. The fact is that if Bitcoin were a country, it would be the 24th biggest energy consumer in the world. No reputable company or brand could get away with shirking their ESG responsibilities by pointing to the fact that others might be worse performers, so why should a cryptocurrency be any different?
Furthermore, the increasing regulatory attention to ESG matters could become a problem if firms need to start justifying their involvement with crypto from an ESG perspective. As such, the crypto space needs to take the ESG agenda seriously and begin to make changes rather than risk it becoming an existential threat.
Reducing the Carbon Footprint
What can be done? Well, a shift to renewable mining energy is one step in the right direction. However, Bitcoin’s decentralized nature means that it’s difficult to demonstrate the percentage of miners using renewables on any meaningful level. Although it would require a concerted effort to mobilize the entire mining community, some kind of unified reporting process could help to lend legitimacy to some of the numbers that get thrown around with abandon.
However, a more meaningful change would be for platforms to simply consume less energy. It’s somewhat telling that while there are plenty of people ready to defend Bitcoin’s energy consumption, few of them would argue that there should be more blockchains consuming the same energy as Bitcoin. Thankfully, almost all of the newly launched platforms over recent years now use the less energy-intensive proof-of-stake consensus, and the good news is that the developer community seems to be migrating to these platforms.
Top-ranking blockchain platforms of 2021 include Solana, Cardano, Polkadot, Algorand, and Polygon, all of which use a variation of the proof-of-stake consensus. Ethereum will join them when it completes the next phase of the Ethereum 2.0 upgrade later this year. However, it’s worth remembering that many of the major altcoins, including Litecoin, Bitcoin Cash, and Dogecoin, all use a variation of proof-of-work, albeit at far lower levels of energy consumption than Bitcoin.
Greener DeFi Investments
So what about those who are developing applications and minting tokens on the blockchain platforms? Admittedly, convincing DeFi’s yield-chasing “degens” that their favorite profitable apps are terrible for the climate is a tricky proposition. However, non-profit app developer Popcorn believes it has struck a balance with its ability to entice both greener-minded investors along with those who are more focused on seeking alpha.
Popcorn uses a series of yield-generating DeFi products that deliver returns competitive enough to make them attractive against the rest of the market. However, all of the profits that the protocol earns in fees are channeled into social impact organizations as part of its commitment to “effective altruism.” Popcorn is run as a DAO, with holders of the native POP token voting on how funds are disbursed.
The project’s commitment to social good starts with ensuring that carbon neutrality is baked into its core. Popcorn is in the process of signing an agreement that will make it the first carbon-neutral DeFi asset management protocol. It will initially be deployed on the Polygon and Solana blockchains, both low-energy, proof-of-stake platforms.
Blockchain for Sustainable Energy
While Popcorn is blazing a trail for sustainability in DeFi, other projects aim to use blockchain technology for the greater good in the broader energy markets. Energy Web Chain is one example, claiming to be the world’s largest energy blockchain ecosystem. It has participants from across the energy sector, including Shell, Siemens, and GE. The Energy Web runs its own Decentralized Operating System, or the EW-DOS platform, a distributed network maintained by Energy Web members. The primary use case for the EW-DOS is clean energy and carbon emissions traceability.
Similarly, PowerLedger is one of the longest-running projects converging blockchain and the energy sector. The self-styled “internet of electricity” has made impressive progress since its foundation in 2016, now operating projects in eleven countries across four continents. Ultimately, it aims to create a decentralized, peer-to-peer energy network where renewables are more easily traded and stored.
So far, much of the cryptocurrency sector seems to consider itself immune from the increasingly intensive climate pressure facing firms in most other sectors. But this is an ostrich-like approach to the situation. If it’s to maintain its newly-acquired status as a respectable, investable asset, then the crypto sector needs to embrace ESG, champion those projects blazing a trail for climate change on its behalf, and look for new ways to continuously improve its carbon footprint.